Federal banking regulators continue to put forward proposed rulemaking after a series of mid-sized bank failures earlier this year exposed apparent gaps in the U.S. regulatory system.
The Federal Deposit Insurance Corporation (FDIC) announced three requests for comment Tuesday regarding rule proposals and guidance largely aimed at curbing the risk of contagion in the event of a massive bank failure, like the ones that occurred at Silicon Valley Bank, Signature Bank, and First Republic Bank in the spring.
The first notice of proposed rulemaking would strengthen the existing resolution planning requirements for insured depository institutions with at least $100 billion in total assets. The proposal would require a resolution submission from covered institutions every two years, with resolution plans expected to incorporate lessons learned from previous plan reviews, among other information.
The second proposal, issued jointly with the Federal Reserve and Treasury Department’s Office of the Comptroller of the Currency, would require large banks with total assets of $100 billion or more to maintain a layer of long-term debt to absorb potential losses. The proposal is not aimed at global systemically important banks but instead is expected to impact domestic systemically important banks.
“[B]y reducing the risk that uninsured depositors would face losses, long-term debt can reduce the speed and severity of bank runs and limit the risk of contagion when a bank is under stress,” the FDIC said of the proposal’s requirements.
Finally, the FDIC and Fed issued proposed guidance for large bank holding companies designed to strengthen their “living wills” that detail their strategy for resolution under bankruptcy in the event of material financial distress or failure.
“The guidance would generally apply to bank holding companies and foreign banking organizations with more than $250 billion in total assets but that are not the largest and most complex companies, which are already subject to guidance on resolution planning,” the FDIC explained.
Comments are due on each proposal by Nov. 30.
In remarks regarding the proposals, Rohit Chopra, chair of the Consumer Financial Protection Bureau and a member of the FDIC Board of Directors, said the moves “would help protect the public in the event of a massive bank failure, reducing the need for emergency measures, rapid megamergers, and big losses to the Deposit Insurance Fund.”
He added the proposals “give the FDIC more options and greater flexibility” once it takes over as the receiver of a failed bank.
“The current approach to deal with a large failing bank is to quickly sell it to an even larger bank,” Chopra said. “… [T]he long-term debt requirement and the submission of wind-down plans will give the FDIC more time and more options. The FDIC can maximize value and minimize negative spillover effects if it can auction off individual business lines, regional branch networks, or otherwise restructure the bank.”
Acting Comptroller of the Currency Michael Hsu, another FDIC board member, also supported the proposals.
“As the large bank failures of this spring have shown, banks and regulators cannot afford to be complacent when it comes to resolution,” he said in a statement.
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